| Morgan Daldona, Head of Research at Global X Investment Company |
The crisis in Ukraine could push oil prices above $ 100 a barrel, inflation forecasts increase market volatility, and Wall Street companies sign an excellent reporting season.
Inflation indices continue to climb. Last week, the US government bond yield curve climbed against the backdrop of January’s inflation data, indicating that the market is not expecting a slowdown in inflation. Now the question arises whether it would not have been more correct to precede the beginning of the ascents.
That is, it may have been the right move to toughen up while the economy emerged from the corona crisis, in order to moderate demand and maintain price stability until supply chain conditions improved. Now the window of opportunity is shrinking.
Looking ahead, as supply improves, while demand declines following increases later in the year, towards the end of the year there may be a decline in global growth forecasts – and this may lead to lower stock market performance compared to previous years.
The volatility now in the market is mainly the result of the geopolitical tensions surrounding the Russia-Ukraine crisis and the forecast for interest rate hikes. There is also a certain connection between the two factors. If the West imposes sanctions on Russia, this could lead to a drop in supply, and consequently to a rise in its price to more than $ 100 a barrel. In such a case, energy prices will rise and inflation will rise – and this may require more aggressive tightening of monetary policy.
This seems to be the profit scenario in the market, as reflected in the interest rate forecasts for Western countries. If the crisis is resolved, it is possible that this will also lead to a decline in inflation forecasts, since the conditions relating to the supply chain actually show improvement.
The financial statements season is coming to an end, when the data and the companies’ statements also show a picture of high demand on the one hand and problems in the supply chain and an increase in costs on the other. More than 75% of the companies included in the index reported higher-than-expected earnings per share (EPS), especially from IT companies. The leading technology companies have managed to roll out the price increases to consumers and expect high demand also in 2022.
A positive point that emerges from the reports is the increase in capital investments (Capex) on the part of the companies: an increase of 38% in annual comparison and of 20% compared to data about two years ago. The increase in capital investment may lead to a higher level of efficiency and output. The increase in the profitability of the companies is what interests the investors in the current environment.
The author is the head of a research department at the GlobalX mutual fund company. The above should not be construed as investment advice, recommendation or opinion regarding any financial products.